EM selloff: How Indian stock markets escaped the rout

The rupee is now less prone to an EM currency sell-off due to the narrowing CAD, a Reuters poll of foreign exchange strategists shows.

A large part of the bearishness seen on Indian stock markets last year was attributed to the fall in the Indian currency, which plunged to near-69 levels against the US dollar in late August.

The S&P BSE Sensex slipped nearly 6 per cent, or over 1,000 points, in three months starting August. And then stepped in the government and the RBI in the month of September announcing a slew of measures, including the much criticised rate hikes and curbs on gold import.

The Sensex made a U-turn and rallied over 13 per cent in a matter of three months starting September. The 30-stock index rose from 18,619.72 recorded on August 30, to 21,170.68 observed on December 31, 2013, which translates into an upside of 13.7 per cent in three months.

Curbs on gold import duty saw the current account deficit narrowing to $5.2 billion, or 1.2% of the GDP, in the September quarter.

The figure was the lowest in over four years.

The rupee is now less prone to an emerging market currency sell-off due to the narrowing current account deficit, a Reuters poll of foreign exchange strategists shows.

Coming to RBI's rate hikes, experts say it has been a positive for the rupee.

The RBI, after three consecutive rate hikes, before the December 18 policy meet, raised the repo rate by another 25 basis points in its latest policy meet on January 28.

The same day, that is January 28, the rupee staged a dramatic recovery, rising 58 paise against the US dollar.

"It was the rate hike that added to rupee's rise," said Jamal Mecklai, CEO, Mecklai Financial.

"The day when the RBI announced a rate hike, the rupee appreciated by 58 paise ... it may go down a little bit further, but then it will rebound," said Dr SK Ghosh, Chief Economic Adviser, Economic Research Department, SBI.

Today, the rupee is trading at around 62 levels against the greenback.

Linking the rise of the rupee to the stock market, experts believe it is the stable rupee which is holding the Indian stock market in the face of a EM selloff.

Emerging market (EM) countries are among the most exposed to a reduction or reversal of financial flows given that they saw large amounts inflows due to the US stimulus.

“Emerging markets are therefore not a homogeneous group. Financial markets are likely to remain volatile as long as the monetary normalisation process continues. During this period, countries with external imbalances or a reliance on external funding are likely to remain more vulnerable than others,” Moody’s said in a report.

“An example of this differentiation is the far greater impact on the currencies of South Africa and Turkey than say those of Mexico, Brazil, India and Russia,” added the report.

The global rating agency says South Africa and Turkey share the following specific features as they both have a combination of (i) relatively larger current account deficits, (ii) lower-than-average total hard currency reserves, and (iii) lower official interest rates than in comparable emerging markets (in spite of these two countries having floating exchange rates, like most emerging markets now).

According to experts, stabilisation in current account deficit, huge forex reserve build-up are some of the factors which helped shield India from major selloff as was seen last year when the talks of tapering began.

Jyotivardhan Jaipuria, HOR, BofAML, says outflows are being seen in emerging markets and and other global equities; and that is reflecting in India also.

“In some sense, probably India has been better off because our currency has been rock solid at a time where lots of other emerging market currencies are taking a beating," he added.

In effect, as it appears, the improved macro situation supported the ruppe, which in turn helped the stock market ward off a big negative impact of the EM selloff due to the $20-billion QE tapering.